In the unlikely event these mad scribblings dissuaded anyone from hopping aboard the Bitcoin train, I humbly apologize. (Although it did subsequently fall 90% from its June 2011 high.)

I don’t think any of the analysis was off base, but nevertheless I have moderated my views a bit, and now suspect Bitcoin, or something like it, is here to stay.
The most compelling anti-Bitcoin thesis is that widespread acceptance would be doomed, because Bitcoin is too powerful for authorities to tolerate. The US didn’t kill off secret Swiss bank accounts, offshore credit cards and payment schemes like NetTeller, ostensibly in the fight against terror but more plausibly in the fight against tax evasion, to now look kindly on an even more elusive scheme to store and transfer wealth away from the taxman’s prying eyes.

There is an ongoing battle for the soul of Bitcoin. In a fever dream of Silicon Valley triumphalism, Bitcoin is the legitimate payment system of the future. In a world where Bitcoin is a legitimate alternative payments system, you will have ETFs1, exchanges, eWallets, banks, ATMs, regs, fees, deposit insurance, all the functions of the (horrors!) existing system. But all watched over by machines of loving grace, the vig will go to pure-as-snow Silicon Valley instead of black-hearted New York. Surely nothing bad can happen in the cloud? Clouds are such soft white puffy things.

The other scenario is where Bitcoin becomes an underground darknet like Gnutella, BitTorrent, contraband black markets. It would be an illegal currency existing at the margins for illegal activities in ‘strong’ states that have the ability to police financial transactions, and more widespread in ‘weak’ states that don’t have that ability.

And it can’t be both. Either it’s legit, and every Bitcoin transaction is subject to the same sales tax, income tax, withholding, Form 8300, anti money laundering regs, etc., etc., or it’s not, and you can’t perform the exact same transactions in Bitcoin and avoid income tax, sales tax, etc.

The latter scenario of a ban on Bitcoin for many types of transactions, is far more likely than the former scenario of widespread legitimacy. Unquestionably, the current political and banking systems are highly intertwined and heavy-handed about guarding their turf. And recent events such as the NSA revelations, the Silk Road takedown, the Tor and Anonymous infiltrations, not to mention Stuxnet, show their ability and determination to act against perceived (and broadly defined) unfriendly cyberspace interests.2 While it’s not outside the realm of possibility that financial crises, a collapse in the credibility of the legitimate financial system, and a new political regime determined to cripple the banks and wielding Bitcoin as a weapon, wrests control of the commanding heights of the payments system, that’s not the way I would bet.3

No, a series of Bitcoin ‘Black Fridays’ where use, ownership of Bitcoins are banned in various jurisdictions, owners must register with the state and transact through approved processors, etc., is assuredly in the offing. The current Bitcoin bull market appears to be driven by adoption in China, to evade capital controls and move wealth offshore. As long as authorities turn a blind eye, Bitcoin is more convenient than exporting a bunch of widgets, underreporting the amount they sold for, and diverting the balance to a Cayman Islands account. But seriously, how long do you think that blind eye is going to last? And do you really think the authorities in places like the US and China don’t have the will or the way to put a halt to those transactions?

There are two reasons why Bitcoin might have a future. The first is the heavy-handed use of the payments system for political purposes, to prevent people from dealing with people the US doesn’t like e.g. Wikileaks, Pirate Bay, or Iran, and above all, secret bank accounts. Paradoxically, the harder the US comes down on activities they disapprove of, the more clearly they illustrate the need for alternatives. And where there is a need, the Internet creates an alternative.

The second reason is that one must distinguish the Bitcoin public distributed ledger from the Bitcoins themselves. ‘Mining’ has a faint whiff powerful stench of absurdity about it, similar to Keynes’s money-jar-burying employment program, burning a billion dollars’ worth of electricity to create a billion dollars’ worth of Bitcoin. But one can easily see a world where the ‘property deeds’ for many assets are stored in something like the Bitcoin ledger, and anything can be transferred back and forth there.4 It has advantages of a public API, audit trail, independence from any centralized authority.

If you were an engineer designing a currency from scratch with the end user in mind, to make it easy, quick, cheap, and secure to process transactions, store value securely, there is no way you would create Bitcoin in its current form. Its key feature is purely to evade centralized control. And as far as most of the world’s power structures are concerned, that is a massive bug, not a feature.

It’s a great hack and experiment, but I still don’t see a mainstream legit future for Bitcoin, just a series of crashes and ‘Black Fridays.’ But as a darknet, it seems hard to kill in a world where people want to buy contraband ever more broadly defined, deal with pariah actors, or just avoid ever more pervasive electronic scrutiny and state authority. And as the technology proves itself and becomes widely understood, there may be many yet-to-be-discovered and interesting use cases.

1Pro tip: if you need an ETF to make your currency easy to transact, it isn’t a great medium of exchange. I don’t really see the Winklevii ETF being approved. The SEC is a bunch of lawyers, not capital market theorists and innovators. Somewhere there is a lawyer who got handed this registration statement and asked, WTF is a Bitcoin? And then he called around to the Fed, the Treasury, the banks where he hopes to soon be employed. And everyone said they wish everyone associated with Bitcoin would die in a fire. And where do you draw the line? If you can have a Bitcoin ETF, what about other real and virtual goods? Why not an airline frequent flier miles ETF, a Tamagotchi ETF, a Beanie Babies or pet rock ETF?

2Personally, I would be just a little surprised if no current events like these cyberwar success stories had any connection to NSA eavesdropping.

3Ironically, disruption of the existing financial arrangements inevitably entails exactly the same horrors of crisis and hyperinflation, which afficionados claim Bitcoin is the solution to. Sometimes you have to kill the village to save it. Zombie economics.

4 Even dollars or euros or gold held at some financial institution. Imagine that!